Technology Analysis & Strategic Management

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Managing disruptive innovation with technology

acquisitions: the informing case of software-based
high-technology industries

Marcus Wagner

To cite this article: Marcus Wagner (2016) Managing disruptive innovation with technology
acquisitions: the informing case of software-based high-technology industries, Technology Analysis
& Strategic Management, 28:8, 979-991, DOI: 10.1080/09537325.2016.1181736

To link to this article: https://doi.org/10.1080/09537325.2016.1181736

Published online: 06 May 2016.

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TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT, 2016
VOL. 28, NO. 8, 979–991
http://dx.doi.org/10.1080/09537325.2016.1181736

Managing disruptive innovation with technology acquisitions: the

informing case of software-based high-technology industries
Marcus Wagnera,b
a
Chair of Management, Innovation and International Business, Augsburg University, Augsburg, Germany; bBureau
d’Economie Théorique et Appliquée, Université de Strasbourg, Strasbourg, France

ABSTRACT ARTICLE HISTORY

In high-technology industries, the use of acquisitions as a means of Received 4 August 2013
sourcing expertise is important, because it provides a potential remedy Revised 4 January 2016
to the challenges of disruptive innovation. Investigating this issue Accepted 13 April 2016
empirically in the context of software-based high-technology industries
KEYWORDS
with nested econometric, large-scale descriptive and case study Disruptive innovation;
methods confirms a substitutive relationship between acquisitions and institutional theory; resource-
firms’ own research activities as a main driver. This relationship confirms based view; acquisition;
that acquisitions are a remedy for disruptive innovations. For a subset of software
acquisitions, this is related to target characteristics, which reveals that
acquisition waves do not explain the timing of acquisitions. This
confirms that for software-based industries, disruptive innovation theory
needs to be modified, in that the large incumbents need not be tied to
an existing technological trajectory. Specifically, those incumbents with
low patenting intensity acquire targets with many prior patents, and in
doing so avoid being trapped by disruptive innovation.

Introduction
Innovation activities in high-technology industries pose considerable challenges for technology and
innovation management. These are linked to network effects from geographical clustering (e.g.
Silicon Valley), the increasing speed of the introduction of new technology (Galbraith and
McAdam 2013) and market exit caused by disruptive innovation (Christensen and Bower 1996).
This paper analyses the interplay of these factors (with a focus on the last one) in one software-
based industry, namely electronic design automation (EDA) which forms part of the semiconductor
ecosystem. This ecosystem has a long history of radical innovation taking place through distinct
industry cycles of high and low demand and features the aforementioned challenges strongly. The
acquisition of technology-rich targets can address these challenges, especially with regard to disrup-
tive innovation in an increasingly open business environment (Graebner, Eisenhardt, and Roundy
2010; Galbraith and McAdam 2011). Disruptive innovation has been defined as an innovation that
‘ … introduces a different set of features, performance, and price attributes relative to the existing
product, an unattractive combination for mainstream customers at the time of product introduction
… although a different customer segment may value the new attributes’ (Govindarajan and Kopalle
2006: 15).
The literature supports the suitability of acquisitions as a means to address disruptive innovation.
Specifically, large firms could be adopting an acquisition strategy targeting young firms to offset
lower and less radical innovation levels (Bertrand-Cloodt, Hagedoorn, and Van Kranenburg 2011).

CONTACT Marcus Wagner marcus.wagner@wiwi.uni-augsburg.de Chair of Management, Innovation and International

Business, Augsburg University, Wirtschaftswissenschaftliche Fakultät, Universitätsstr. 16, 86159 Augsburg, Germany
© 2016 Informa UK Limited, trading as Taylor & Francis Group
980 M. WAGNER

However, the feasibility of this approach depends on the industry concerned. One important charac-
teristic of software-based industries is their low capital intensity, which means that start-ups do not
require large investments in fixed assets. As a result, the total asset value of the average entrant in a
software-based industry is relatively low. Therefore, a complete acquisition of a technology-rich
target is more feasible and hence more likely (compared to, e.g. the acquisition of just a minority
shareholding in such a target).
Addressing the issue of how an incumbent can combat disruptive innovation, this paper specifi-
cally analyses if, with the industry characteristics outlined in the last paragraph, acquisitions can
help to avoid incumbents exiting market because of disruptive innovation. It does so by simul-
taneously accounting for influences other than the incumbent’s own R&D weaknesses – such as
acquisition dynamics (e.g. herd effects) – and by accounting for variations in a firm’s internal weak-
nesses (in terms of output- and input-related weaknesses) and related differences in acquisition
motives.
The study adopts a mixed methods approach using nested econometric, large-scale descriptive
and case study analyses (based on one specific area in the EDA industry, namely design for manufac-
turability) to address a conundrum found in the literature on disruptive innovation, namely why the
Christensen and Bower (1996) logic applies in some instances more than in others. Addressing this
issue also responds to recent controversy and academic calls to more clearly identify the boundaries
of disruptive innovation (Danneels 2004; Spinardi 2012; Lepore 2014; de Langen 2014).

Review of extant literature

The innovation and entrepreneurship literatures have identified a number of conceptual acquisition
reasons ranging from innovation-related ones such as infeasibility and higher cost, higher risk or
delays from in-house solutions to enhancing market power and achieving strategic renewal
(Lambe and Spekman 1997; Graebner, Eisenhardt, and Roundy 2010). The remainder of the review
will focus on the innovation-related reasons and the role of disruptive innovation for acquisitions,
as well as on empirical evidence.

Innovation-related reasons for acquisitions

Innovation-related reasons for acquisitions are most prevalent in high-technology industries (Ranft
and Lord 2002), with acquisitions being less costly or risky, following institution-theoretical argu-
ments (Williamson 1975). Therefore, this stream of literature proposes that acquisitions are made
because doing so is cheaper than internal innovation.
In contrast to the idea that internal innovation is more costly, infeasibility refers to the inability of
larger firms to innovate more radically. Specifically, they are hindered by their existing customers or
owing to a lack of capabilities, as is proposed in the concept of disruptive innovation, mainly with
reference to the resource-based view (Christensen 1997; Henderson 2006). The capacities lacking
from firms might include intellectual property, lack of human capital and competency-destroying
innovation (Henderson 1993).

Role of disruptive innovation for acquisitions

The literature describes how the reaction of incumbents to disruptive innovation can be understood
similarly to other capability issues, arguing that disruptive innovation challenges lead incumbents to
focus on existing markets or develop new capabilities (Henderson 2006). The theoretical implications
of such behaviour in software-based industries may differ to those observed in other high-technology
industries like the hardware-based segments of the semiconductor industry (Henderson 1993; Chris-
tensen and Bower 1996). This is mainly due to ‘time compression diseconomies’ (Dierickx and Cool
1989, 1504) as detailed below.
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 981

Whereas acquiring the capabilities needed to address disruptive innovation challenges as an

incumbent is often prohibitively expensive in hardware-based segments, this is not the case in soft-
ware-based industries, due to the generally lower capital intensity. In industries where incumbents
are not able to acquire competencies at a reasonable price, they have to either hope that the inno-
vation will not render them uncompetitive, or else have to face a forced market exit. In software-
based industries where the cost of acquisition is relatively low, incumbents have a third option
which is to acquire competencies that enable them to pursue disruptive innovation themselves.

Empirical evidence on innovation-related acquisitions

Empirical studies find that US firms acquire innovative targets to gain access to their technologies, that
acquisitions substitute for internal innovation output in the semiconductor industry and that compa-
nies make a strategic choice between the acquisition of radical innovation and internal R&D activity
(Hagedoorn and Duysters 2002; Henkel, Rønde, and Wagner 2015). Other research shows that while
the importance of licensing as a means of technology sourcing has not significantly increased over
time, technology-related acquisitions have (Lindholm 1997; Desyllas and Hughes 2008).
The empirical evidence therefore confirms a potentially important role for innovation-related
acquisitions in addressing challenges posed by disruptive innovation. This link is explored further
and condensed into research questions in the next section.

Development of research framework and research questions

Against the background of the literature review, the research questions underlying the analysis focus
on the determinants of larger incumbents acquiring smaller firms and start-ups in software-based
industries. Taking into account both the institution-theoretical and resource-based considerations
introduced in the last section, they derive from a framework outlining two necessary conditions
for acquisitions to address disruptive innovation.
Related to the first, necessary, condition, research analysing the association of R&D and patenting with
acquisitions high-technology industries indicates that the choice between making and buying R&D is a
main driver for the acquisition of innovative small firms (Desyllas and Hughes 2008). Larger incumbents,
for whom continued R&D success is more crucial for economic success than for younger firms with lower
market shares, are more likely to substitute for R&D weaknesses by means of acquisitions to obtain access
to new products and technologies or to complex knowledge bundles (Ranft and Lord 2002).
The relevance of acquisitions for substituting R&D weaknesses can thus be linked to resource-
based arguments relating to path dependencies that prevent larger firms from carrying out specific
innovations (Dosi 1982). One of the main reasons for this is that disruptive innovations are compe-
tence-destroying (Henderson 2006) and firms that are unable to innovate at an acceptable cost
can use the acquisition of technology-rich targets to make up for their missing capabilities
(Puranam, Singh, and Zollo 2006; Desyllas and Hughes 2008). As a first, necessary, condition for acqui-
sitions countering disruptive innovation, a substitutive relationship between own innovation and
acquisitions is therefore required (and thus needs to be confirmed empirically), which should
focus on the main weakness of the incumbents.
Concerning the second necessary condition, next to resource-based arguments relating to capa-
bilities and dependencies, institution-theoretical considerations apply simultaneously in the context
of innovation-related acquisitions, especially with regard to the question of acquisition timing. On
this subject, Graebner, Eisenhardt, and Roundy (2010) stress that early acquiring firms can trigger
competitor responses in terms of similar acquisitions. This could lead to acquisition waves, where
target firms in similar technology segments of an industry are acquired over a short period of
time, even though this is no rational behaviour on the part of the acquirers.
Given the high complexity and uncertainty surrounding technology-related acquisitions, this
could also lead to sub-optimal acquisition choices, which in turn hinder incumbents from acquiring
982 M. WAGNER

in the areas of their greatest weaknesses (Graebner 2009). As a second necessary condition for acqui-
sitions countering disruptive innovation, it is therefore also necessary to rule out institutional band-
wagon effects based on acquisition waves, institutional mimicry reacting to competitors’ acquisitions
or similar irrational behaviour driving innovation-related acquisitions.
This paper empirically tests these two conditions by analysing the determinants of the acquisition
of relatively young and technology-rich target firms, and how patterns of such acquisitions evolve.
This is done by distinguishing quantitative and qualitative dimensions of technological acquisitions
that have been identified in the literature, namely the number of acquisitions and their technological
value (Cloodt, Hagedoorn, and van Kranenburg 2006; Puranam, Singh, and Zollo 2006). Based on the
above considerations, two sets of research questions are derived to empirically test the correspond-
ing two conditions above:

(1) Is acquisition in software-based industries motivated by substitutivity with internal R&D (which
would be an indication that acquisitions mitigate disruptive innovation)? Does the association
differ depending on the dependent variable addressing the amount of intellectual property
residing in the target or not (i.e. are acquirers intent on addressing their main weaknesses)?
(2) Do acquisitions relate mainly to specific technology segments and when are targets acquired?
Can timing and segment specificity be related to acquisition waves, or acquisitions being trig-
gered by competitors (which would suggest that, in addition to disruptive innovation, other
potentially irrational determinants matter)?

Methodology
The empirical analysis of the above research questions centres on one specific field of the global
semiconductor industry, namely EDA which provides purely software-based tools for chip design
(rather than hardware-based tools for chip manufacturing) and has very beneficial characteristics
for the purpose of this study (compared to other industries, where fields cannot be delineated
and distinguished as clearly as in the semiconductor industry).
First, EDA is a relatively concentrated industry that is characterised by continued acquisition
activity and is described as fully based on software (rather than hardware). Second, because of its
embeddedness in the semiconductor industry, there is permanent demand for innovation from
EDA firms and as a result patenting is widespread. That practice provides objective data only available
to a far lesser degree in other industries. Third, EDA is in many respects paradigmatic for software-
based industries, and therefore is well suited to deliver generalisable results.
Given the necessary breadth of the above research questions, a multi-stage and multi-method
empirical strategy that allows for extensive triangulation was adopted (Miles and Huberman 1994).
The analysis therefore initially employs econometric analyses based on panel regression models of
the more aggregate quantitative aspects of the above research questions, which mainly relate to
determinants of acquisitions and the first necessary condition (and from which inferences of the suit-
ability of acquisitions for combatting disruptive innovation can be drawn).
This is based on primary data collected from established sources such as the SDC Platinum and
Worldscope Disclosure databases and the US Patent and Trademark Office, which covers the acqui-
sitions by the 14 largest firms in the EDA industry 1981–2005. These firms account for 80% of industry
sales, which confirms that this sample is highly representative (Wagner 2011). In addition, across all
years, over 600 acquisitions (of which 140 relate to targets holding at least one patent) by these 14
firms are included in the analysis. This reflects an even higher share of the cumulative total acqui-
sitions in the EDA industry than the sales share, given that the few smaller firms not included in
the data acquire with the lowest probability. Furthermore, over the above period, firms in high-
technology industries acquired three to five times more targets than in other industries (Inkpen,
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 983

Sundaram, and Rockwood 2000), which suggests that focusing on EDA is a suitable choice for the
purposes of the current study.
For the set of firms, data were collected for each of the years 1981–2005 on a number of indepen-
dent variables relating to various firm characteristics (leverage, sales, R&D intensity as a measure for
R&D efforts and inputs, liquidity, patents granted and firm location), as defined in Table A1 of the
appendix. These independent variables are potential determinants of the dependent variables relat-
ing to acquisition behaviour, namely number of acquisitions and their technological content (as also
defined in Table A1).
While the former variable is a good activity measure that can help to understand dynamics, the
successful patenting of a target prior to acquisition can be used to assess the extent of its technologi-
cal base. Using a five-year timeframe prior to the acquisition year to measure the level of technologi-
cal knowledge is a method frequently utilised in the literature. Therefore, it is considered to offer a
suitable balance between the declining value of a target’s knowledge stock and patent protection
that increases with every year a patent ages, and the increasing level of knowledge stock with
every additional year included (Cloodt, Hagedoorn, and van Kranenburg 2006). Given that patent
data are prone to a truncation bias resulting from granted patents being customarily assigned to
the application year, 2005 was included as the last year of the analysis to ensure no issues arising
from this affected the findings (Hall, Jaffe, and Trajtenberg 2005).
To enable an analysis of the remaining aspects of the above research questions, which mainly
relate to dynamics and the second necessary condition, the aggregate quantitative analysis of acqui-
sition in the EDA industry at the first stage was supplemented at the second stage by a more fine-
grained analysis. It used a subset of the data augmented with secondary data from trade journals,
industry publications, company websites and a content analysis of Securities and Exchange Commis-
sion (SEC) filings. As part of this latter analysis, more detailed information was gathered, on the main
business segment the target was active in, its age at the time of acquisition and information on the
specific segment in which the acquisitions took place for the largest three firms in the industry.
These additional data collected on a subset of entries in the dataset that formed the basis for the
first stage of the empirical analysis helped to address whether acquisitions relate to specific technol-
ogies, and to determine the timing of acquisitions. Finally, a case study on one specific segment,
namely design for manufacturability, was undertaken in order to provide further insights into substi-
tutivity, and the timing of acquisitions to meet the challenges of disruptive innovation based on a
recent prominent and well-defined instance of disruptive innovation in the EDA industry. Figure 1
summarises this nested approach to the empirical analysis, and also shows how it ensures both
depth and representativeness.
Table A2 of the appendix summarises the descriptive statistics and correlations of the data used in
the analysis. It suggests that multicollinearity is not an issue, since all variance inflation factors for the
independent variables are smaller than 2.6, well below the critical value of 5.0 suggested in the lit-
erature (Judge et al. 1985).
Since both dependent variables used are count data, the negative binomial specification is used
(Cameron and Trivedi 1998). Two well-established models are available to analyse the panel data
available to this research, namely fixed and random effects (Johnston and DiNardo 1997). The differ-
ence between fixed and random effects lies in whether the time-invariant effects are correlated with
the regressors (which is the case for fixed effects) or not (which is the case for random effects).
To decide which of the two models is more appropriate, the Hausman test is conducted.

Results
Analysis of the first condition and set of research questions
In order to address the first set of research questions posed, namely what were the reasons for acqui-
sitions in the EDA industry (especially with regard to a substitutive relationship with the acquirers’
984 M. WAGNER

Figure 1. Approach of the nested analysis.

own innovation activities), panel regression models as described in the last paragraph were
estimated.
The information in Table 1 concerning the total number of acquisitions made shows a significant
positive association for acquirer sales levels. For the R&D and patenting intensities, the association is
significant and negative which confirms the existence of a substitutive relationship between internal
R&D and acquired knowledge. Since patents granted to acquirers are a measure of R&D output and
productivity (if normalised by sales for acquirers, see Huang 2011) and R&D intensity is a measure of
R&D input, these relationships suggest that acquirers compensate for R&D weaknesses.

Table 1. Negative binomial model, dependent variable: total number of acquisitions.

Variables RE estimates
Financial leverage (total assets to total equity) −0.446 (0.322)
Current ratio (current assets to current liabilities) −0.077 (0.119)
Sales growth (% over previous year) 0.002 (0.003)
Sales (natural logarithm of net sales in €m) 0.405 (0.130)***
R&D intensity (R&D expenditure to net sales in %) −0.046 (0.022)**
Missing R&D intensity data (dummy; 1 = missing) −29.486 (1,218,611.5)
Patenting intensity (patents granted to net sales) −0.023 (0.013)*
Missing patenting intensity data (dummy; 1 = missing) −0.249 (0.504)
Company headquartered in Europe (dummy; 1 = yes) −0.185 (0.531)
Company headquartered in Asia (dummy; 1 = yes) −1.002 (0.625)
Constant 14.770 (637.877)
Log-likelihood −114.633
No. of observations (firms) 105 (14)
Wald χ 2 42.86***
Hausman specification test χ 2 <0.001
Note: Country base category, USA; RE, random effects.
Significance level: *p < .1.
Significance level: **p < .05.
Significance level: ***p < .01.
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 985

As can be seen in Table 2, concerning the number of patents granted to the target in the five years
prior to acquisition, the main factors significantly associated with this dependent variable are sales
(positively), patenting intensity (negatively) and if the company is headquartered in Europe (posi-
tively). Furthermore, the coefficient of the patenting intensity in Table 2 is considerably greater, as
it is in Table 1.
Overall, the results show that patenting intensity consistently has a significant negative associ-
ation with two different measures of acquisition behaviour in the EDA industry. This supports the
notion that acquisitions substitute for weak innovation output, as indicated by lower levels of
acquirer patenting intensity. The significant negative association of R&D intensity with the dependent
variable in Table 1 shows that acquisition of innovation is a substitute for internal R&D efforts in quan-
titative terms as concerns the number of acquisitions. The significant negative association of patent-
ing intensity together with the non-significant association of R&D intensity with the dependent
variable in Table 2 indicates that firms whose major weakness is not R&D effort, but the output result-
ing from it, focus on the quality of their acquisitions in terms of the extent of innovation output (i.e.
number of patents) residing within their targets. Thus, the first condition formulated above is met.

Analysis of the second condition and set of research questions

In order to address the second set of research questions referring to the type of target and inno-
vation, the data used in the panel estimations were enriched based on trade literature, database
searches and document reviews of the SEC filings of the three largest firms in the industry. Doing
so helps in answering those aspects of the above research questions that could not be resolved in
the panel estimations, especially as concerns timing and acquisition dynamics. This was done initially
in a large-scale descriptive analysis, followed by a case study of one segment (DFM) representing a
recent example of disruptive innovation in the EDA industry.
In order to assess whether the three largest firms in the industry (Cadence, Synopsys and Mentor)
acquired targets in specific fields of technology at similar points in time, based on detailed descrip-
tions and Standard Industry Classification (SIC) codes of the targets acquired by these top three firms
in the industry, the technology segment most relevant for each individual acquisition was identified.
Then acquisitions were compared by year across the top three firms. Based on this process, Table 3
summarises the number of acquisitions of each firm that were in a technology segment in which the
other firms also made acquisitions in that year. The percentage figures provided thus give the

Table 2. Negative binomial model, dependent variable: patents granted to targets.

Variables RE estimates
Financial leverage (total assets to total equity) 0.207 (0.415)
Current ratio (current assets to current liabilities) −0.351 (0.335)
Sales growth (% over previous year) −0.008 (0.010)
Sales (natural logarithm of net sales in €m) 1.097 (0.297)***
R&D intensity (R&D expenditure to net sales in %) 0.010 (0.014)
Missing R&D intensity data (dummy; 1 = missing) −24.352 (203,473.2)
Patenting intensity (patents granted to net sales) −0.066 (0.026)**
Missing patenting intensity data (dummy; 1 = missing) −0.522 (1.071)
Company headquartered in Europe (dummy; 1 = yes) 2.248 (0.913)**
Company headquartered in Asia (dummy; 1 = yes) 0.763 (1.368)
Constant −8.303 (2.488)***
Log-likelihood −122.238
No. of observations (firms) 105 (14)
Wald χ 2 22.56**
Hausman specification test χ 2 <0.001
Note: Country base category, USA; RE, random effects.
Significance level: *p < .1.
Significance level: **p < .05.
Significance level: ***p < .01.
986 M. WAGNER

Table 3. Homogeneity of acquisitions of the top three EDA firms based on technology field.
Year Company: Cadence (%) Company: Mentor (%) Company: Synopsys (%) % acquisitions in same segments out of total
1989 0 0 0 0
1990 100 100 0 67
1991 0 0 0 0
1992 0 0 0 0
1993 0 0 0 0
1994 100 100 0 67
1995 0 0 0 0
1996 100 63 100 70
1997 67 0 67 67
1998 14 100 33 36
1999 0 0 0 0
2000 0 0 0 0
2001 0 0 0 0
2002 33 25 33 30
2003 66 20 0 27
2004 40 50 0 27
2005 0 0 0 0

percentage of the total acquisitions of that firm that related to technology segments where the other
firms also made acquisitions. The right-hand column of Table 3 provides the ratio of acquisitions in
the overlapping technology segments by the total number of acquisitions of the three largest EDA
firms in the year. As can be seen, the overlap in technology segments is very limited. Only in 8 of
the 17 years analysed was an overlap found at all.
Even on these occasions, the overlap never constituted more than 70% of all acquisitions made by
the three largest EDA firms in that year and in half of these periods the overlap was below 40%. This
indicates that acquisition waves or competitor acquisitions are not driving a large proportion of
acquisitions. It follows that at least several reasons matter simultaneously and that firms did not
react irrationally in their acquisitions, for instance in terms of institutional mimicry.
This is also suggested by the total number of acquisitions per segment. In all segments bar one at
least two firms made acquisitions and in one-third of the segments identified all three large firms con-
ducted acquisitions. Furthermore, the number of acquisitions per segment differs only up to 60%
between firms. This rate however only applies to one segment (in four segments the difference
was 0%, in three it ranged between 28% and 50%). Each of the three largest firms acquired other
firms in three segments (in which, respectively, 11%, 50% and 14% of all acquisitions during this
period took place) from 1988 to 2005. Only in one segment did one of the three largest firms
acquire another firm (which represents only 2% of all acquisitions) and the other two never made
an acquisition.
Overall, there is thus no evidence of temporal clustering of acquisitions in specific technologies,
even though in some segments, acquisitions are concentrated in shorter time periods (in all seg-
ments acquisitions take place in at least 2 years, in 2 segments in 6 years, in 1 segment in 10
years and in 15 years, respectively). In 4 of the 9 segments, the time span between the first and
last acquisition is more than half of the 17 years studied. Only in four years (1989, 1990, 2000 and
2005) were all acquisition targets from only one segment, to which however the majority of
targets across all years also belonged. In all other years, acquisitions took place in at least two
(1991, 1992, 1994, 1995, 2001), three (1993, 1997), four (2002, 2003, 2004), five (1999), six (1996)
and seven (1998) segments, respectively. In summary, the findings from this detailed analysis
support that acquisitions are focused on the largest weaknesses of acquirers, which confirms that
the second condition derived above is met.
Finally, to illustrate further how acquisitions address disruptive innovation in the EDA industry, a
case study of one specific area of EDA that emerged only recently is presented. This new area, DFM,
was chosen because recently EDA became integrated into manufacturing processes to facilitate feed-
back from production to design. This indicates it is a disruptive innovation and hence a good example
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 987

to study qualitative aspects related to technology acquisitions. While demand for DFM is largely
driven by electronic system level transitions to smaller chip geometries, it has also disruptive business
model implications, as encountered in similar contexts (DaSilva et al. 2013).
Because the segment has a short history of acquisitions, the case study also illustrates the inter-
action of some of the findings from the analysis reported previously. The number of DFM firms
was 15 (2004), 25 (2005), 25 (2006) and 23 (2007), respectively, with numbers being negligible
before 2004 (Gartner Dataquest 2008; Gary Smith EDA 2008). This indicates that incumbents acquired
DFM expertise rather than developing it themselves. Indeed, the three large incumbents in the EDA
industry (for which information on targets was gathered and analysed in Table 3) have acquired DFM
firms in recent years. For example, Synopsys acquired Numerical Technologies in 2003 and Cadence
acquired Clearshape in 2006. Mentor initially developed its DFM tools in-house, but in 2008 acquired
Ponte, suggesting the internal development was not satisfactory.
The temporal and sub-segmental spread of these DFM acquisitions of the three largest EDA firms
(DFM is currently concerned with four main sub-segments, namely critical area analysis, chemical
mechanical polishing, design flow transformation and lithography compliance check) confirms
that targets do not compete, that is, acquisition timing and focus are not driven by acquisition
waves or similar irrationality. The fact that several of the young firms active in DFM have been
acquired (with the three largest EDA firms all participating in this) indicates that the young firms
developed solutions that were technologically superior to those of the large firms in the industry.
For example, in the field of critical area analysis, Ponte developed the leading technology and was
subsequently acquired by Mentor. In chemical mechanical polishing, Clearshape developed the
best technology and was afterwards acquired by Cadence. Finally, in the field of lithography compli-
ance checking, while Synopsys developed the leading technology, its success was based on the 2004
acquisition of Integrated Systems Engineering (Goldman 2008; Nowak and Radojcic 2005). DFM being
a recent high-profile example illustrates how acquisition is a remedy to disruptive innovation in soft-
ware-based high-technology industries. Furthermore, the case study supports the findings that acqui-
sitions focus on substituting key weaknesses and are not driven by acquisition waves, or other
irrational reactions to competitor behaviour.

Discussion and conclusions

This research contributes to understanding how technology acquisitions help in addressing the chal-
lenges of disruptive innovation in software-based industries. It establishes that acquisitions substitute
for internal R&D and that the specificity and timing of acquisitions is not primarily driven by acqui-
sition waves or other irrationalities, both of which are necessary conditions for acquisitions being
able to counter challenges from disruptive innovation. The results thus refine theorising on disruptive
innovation by showing that established firms in an industry can avoid the usual outcome of disrup-
tive innovation (Christensen 1997). In other words, firms need not exit or significantly underperform
because of disruptive innovations, but can instead access disruptive innovations and underlying
capabilities through acquisitions. Therefore, one important contribution of this research is that it
identifies conditions under which the mistake of staying on an existing technological trajectory
does not necessarily force large incumbents to exit, but can be corrected.
This refines the concept of disruptive innovation. Specifically, the paper contributes by establish-
ing the above conditions based on a fine-grained analysis of acquisition dynamics based on a multi-
stage and multi-method analysis, involving nested econometric, large-scale descriptive and case
study analyses. The paper further contributes by extending the analysis of disruptive innovation
beyond a focus on customers and towards the overall innovation chain and broader industry
network, both of which have been proposed in extant literature as important areas of future research
(Sandström, Berglund, and Magnusson 2014).
This research also identifies necessary conditions for this, namely that acquisitions to address dis-
ruptive innovation require (1) the availability of acquisition targets suitable for large incumbents to
988 M. WAGNER

source technology (i.e. a substitute for internal innovation) and (2) rational acquisition behaviour (i.e.
acquisitions are not driven predominantly by acquisition waves, institutional mimicry or similar irra-
tionality). As concerns (1), the findings confirm that acquisition targets can provide technological
capabilities substituting for internal R&D activity of incumbents in the EDA industry. A need for acqui-
sition exists if for a disruptive innovation (e.g. DFM), none of the incumbents has access, or if only the
focal firm is lagging, whereas other incumbents possess it already. As concerns (2), in terms of path
dependencies, the EDA industry (and other software-based industries) can be characterised by a
number of structural features that support acquisition of disruptive innovations. First, in terms of
structure, the low capital intensity of the industry enables low investments. Related to this, in the soft-
ware-based EDA industry, radical potentially disruptive innovation largely originates with entrants
(Henkel, Rønde, and Wagner 2015). Hence the value of what can be gained by acquiring a target
is high and the low capital intensity of the industry generally makes acquisitions financially feasible
for large incumbents.
Finally, an important ingredient for the stability of incumbents in the EDA industry is that the cre-
ation of products is path dependent, providing incumbents with an advantage. This makes market
entry difficult for start-ups and in turn increases the likelihood of acquisition. As a result, an important
question to guide future research will be how markets for technology and technology intermediaries
matter in this situation (Katzy et al. 2013). In addition to answering this question and the aforemen-
tioned need for addressing linkages in industry networks more comprehensively, there is a need for
more research on how improved technical performance transforms into customer utility, and accord-
ingly future work should address in more depth the interaction of business models and disruptive
innovation (Oskarsson and Sjöberg 1994).
These areas of future research also indicate some limitations of the current research. More specifi-
cally, in order to avoid patent truncation bias, more recent data could inherently not be involved in
some of the analyses reported (even though this was not an issue for the DFM case study, which did
use recent data). However, structural features such as the EDA industry characteristics, the workings
of patent laws and the fact that acquisition patterns in the EDA industry did not change much after
2005 suggest that the gist of the analysis remains representative until today.
In addition, an analysis of the industry network at large could not be carried out since it was
beyond the scope of the data collected, but the potential for future research was highlighted
earlier. Finally, this paper could not address business model aspects in any detail, but highlighted
them for future research and touched on them in the context of the DFM case.
In terms of practical implications, the results provide a more nuanced perspective on managerial
options. For example, Christensen (1997) suggested that incumbents address disruptive innovations
by separating activities related to them organisationally from other activities within the firm. This pro-
posal relates to notions of corporate venturing to address a lack of capabilities (Dougherty 1995). One
variant of corporate venturing is corporate venture capital, that is, the investment by incumbents in
start-ups and smaller firms to meet the same objectives as through internal corporate venturing
(Birkinshaw, Van Basten Batenburg, and Murray 2002). Corporate venture capital investments can
therefore be understood as a first step towards acquisition, in that a small stake in a start-up and
its subsequent increase can ultimately lead to full acquisition. A related implication for practice is
then that incumbents should develop acquisition capabilities that enable periodic monitoring of
potential targets early on in order to make sufficiently informed decisions in the context of corporate
venture capital investment. That is, prior to an acquisition, incumbents can improve their negotiation
position and choice set by making seed investments, thereby funding experiments to illuminate
which are the best target firms to acquire.
In summary, this paper contributes by empirically analysing acquisition determinants and
dynamics in the EDA industry to derive conditions for when in software-based industries acquisitions
help to mitigate negative consequences of disruptive innovation experienced in other industries
(Christensen and Bower 1996). As mentioned in the introduction there is an on-going debate on dis-
ruptive innovation theory, as witnessed by recent Academy of Management conference workshop
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 989

and plenary debates. This paper, by involving acquisitions, relates this to the role of innovation eco-
systems and suggests them as a mechanism that can explain why under certain conditions outcomes
differ to those originally predicted by disruptive innovation theory (Adner 2012).

Acknowledgements
Useful suggestions following presentations of earlier versions of this paper at the 2011 EMAEE Conference (14–16 Feb-
ruary, Pisa) and the 2013 ICSOB Conference (11–14 June, Potsdam) are gratefully acknowledged as are comments from
two reviewers and the editor-in-chief, Prof. James Fleck. This paper is dedicated to the memory of Gary Smith.

Disclosure statement
No potential conflict of interest was reported by the author.

Notes on contributor
Marcus Wagner is a full professor at Augsburg University and visiting professor at International Hellenic University. His
research interests are innovation/entrepreneurship, sustainability and international business. He published on these in
journals such as Research Policy, Long Range Planning and Journal of Business Venturing.

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Appendix

Table A1. Description of variables.

Variable name Description
Independent variables
Financial leverage Ratio of total assets to total equity
Current ratio Ratio of current assets to current liabilities
Sales growth Growth of sales over previous year (in %)
Sales Natural logarithm of net sales (in €m)
R&D intensity Ratio of the year’s R&D expenditure to net sales (in %)
Missing R&D intensity Dummy for missing R&D intensity data (value of 1 if missing)
Patenting intensity Number of patents granted (dated to application year) divided by net sales
Missing patenting intensity Dummy for missing patenting intensity data (value of 1 if missing)

(Continued)
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 991

Table A1. Continued.

Variable name
Company headquartered in
Europe
Company headquartered in Asia
Dependent variables
Total number of acquisitions
Patents granted to targets
Description
Binary variable assuming unity if company is headquartered in Europe (value of 0 if not)
Binary variable assuming unity if company is headquartered in Asia (value of 0 if not)
Total number of acquisitions made by an acquirer in a given year
Total number of patents of all targets acquired in a given year in the five years prior to
acquisition

Table A2. Summary statistics and correlations.

Correlations
Variables M Std. dev. Minimum Maximum 1 2 3 4 5 6 7
1. Financial leverage 1.73 0.78 1.08 6.36
2. Current ratio 2.52 1.71 0.6 12.09 −0.36***
3. Sales growth 35.42 97.32 −30.65 716.69 −0.07 −0.01
4. Sales 11.62 1.54 7.28 14.17 −0.06 −0.17* −0.32***
5. R&D intensity 32.68 83.9 0 828.97 −0.06 0.02 0.67*** −0.29***
6. Patenting intensity 122.07 499.53 0 4137.93 −0.03 0.02 0.59*** −0.34*** 0.91***
7. Firm in Europe 0.15 0.36 0 1 0.11 0.11 −0.08 −0.25** −0.07 −0.10***
8. Firm in Asia 0.06 0.24 0 1 −0.08 −0.11 −0.05 −0.26** −0.06 0.07** −0.11
Note: M, mean; std. dev., standard deviation.
*p < .1.
**p < .05.
***p < .01.